Tax Reform: Focus on Broadness and Income

The underlying theme of the 2012 legislative session was taxes, specifically the issue of tax reform. Gov. Martinez put the gross receipts tax on the agenda with her proposals to both exempt certain small businesses from the tax and to reduce the incidence of “pyramiding” which forces businesses and consumers to pay taxes on top of taxes in this state. Forty-million dollars of welcome tax relief was included in the budget, but issues remain.

Senate Finance Committee Chair John Arthur-Smith, D-Deming, made a dramatic point with the introduction of legislation that would have eliminated New Mexico’s gross receipts tax entirely. Smith’s point is that New Mexico’s gross-receipts tax has come to resemble Swiss cheese. Too many loopholes have been added to the tax over the years, thus driving rates on the robust gross receipts tax upward. The tax is now charged at rates rivaling sales tax rates in many states.

So, why not just get rid of the tax and go to a straight sales tax, thus eliminating “tax pyramiding?” This would be an ideal solution, but New Mexico is heavily reliant on the federal government’s massive presence here and doing so would result in massive revenue losses to the state.

While exact numbers are difficult to find, it is estimated that the gross receipts tax on federal activities that are not taxed in other states (the labs, military bases, etc.) brings in about $300 million annually to the state’s coffers. Regardless of the specific number, this is a lot of money for policymakers to forego willingly (let alone the services taxed by the GRT that are not taxed by other states).

The problem with attempts to make the gross receipts tax less economically harmful while keeping it intact is that such moves add to complexity and can potentially make fairness even more difficult. Transparency of taxation and tax burdens could also be negatively impacted.

Instead of futile attempts to make the gross receipts work in ways it was not intended, our research and analysis of the political situation indicates that the best that can be done with the tax is to attempt to restore it to what it was originally intended. That is, a low, flat, broad, tax that touches everything. Doing so will still result in “pyramiding,” but at low rates, this can be less problematic.

But, that doesn’t mean that Gov. Martinez and the Legislature should give up on making New Mexico more business-friendly. The first reform that can be enacted to make our state more economically prosperous doesn’t involve taxes at all. Rather, it is enactment of a “Right to Work” law. Indiana recently became the latest state to adopt such a law.

If New Mexico were to do so, it would suddenly be “on the radar” for a variety of businesses and industries that don’t want to be held hostage by aggressive and intractable unions that can legally force prospective workers for a business to pay union dues.

In terms of tax reform, Gov. Martinez should take a cue from Gov. Richardson who cut taxes on income in a successful effort to spur economic growth. Taxes on income, by their nature, hinder entrepreneurs and businesses. Onerous taxes on income are like having a “closed for business” sign on your front door.

Richardson’s tax cuts took New Mexico from a business-unfriendly personal income tax rate of 8.2 percent to a moderate 4.9 percent. The state’s economy did, indeed, grow relatively fast as a result of those cuts and no longer finds itself among the bottom five in personal income.

If Gov. Martinez doesn’t want to take on the personal income tax at this time, perhaps she would consider tackling New Mexico’s corporate income tax. We currently have the highest corporate tax rate in the region (7.6 percent). Rep. Strickler of Farmington introduced legislation to reduce that rate to 4.8 percent this past session. The bill never made it out of the Taxation and Revenue Committee.

The good news is that New Mexico’s elected leaders are having serious discussions about tax friendliness and policies that generate economic growth. Historically, New Mexico has been too reliant on the federal government or its mineral wealth. It must become more independent. This discussion is important and we look forward to working with legislators and the governor to make our state more prosperous.

Paul Gessing is the president of New Mexico’s Rio Grande Foundation, an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.